If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Suzhou Etron TechnologiesLtd (SHSE:603380), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Suzhou Etron TechnologiesLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.099 = CN¥144m ÷ (CN¥2.4b - CN¥960m) (Based on the trailing twelve months to September 2023).
Thus, Suzhou Etron TechnologiesLtd has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Electronic industry average of 5.0%.
View our latest analysis for Suzhou Etron TechnologiesLtd
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Suzhou Etron TechnologiesLtd's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Suzhou Etron TechnologiesLtd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.9% from 14% five years ago. However it looks like Suzhou Etron TechnologiesLtd might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Suzhou Etron TechnologiesLtd's current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 9.9%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From Suzhou Etron TechnologiesLtd's ROCE
In summary, Suzhou Etron TechnologiesLtd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 27% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Like most companies, Suzhou Etron TechnologiesLtd does come with some risks, and we've found 2 warning signs that you should be aware of.
While Suzhou Etron TechnologiesLtd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.